Ch. 12 S7 Flashcards
Identify the position: An investor shorts 1 XYZ May 50 call at 3 and is long 1 XYZ May 40 call at 5.
A spread, which is the sale and purchase of calls or puts
T/F: option sellers want contracts to expire at the money or out of the money.
T; if the option expires worthless, the seller would keep the premium
Sandra buys 1 ABC Dec 70 call at 4. Does Sandra have a right or an obligation?
A right to buy at 70
Sue sells 1 XYZ Jan 50 put. To create a short straddle, Sue must ___________.
Sell 1 XYZ Jan 50 call
T/F: A 60 put with the market at 60 is at the money.
T
Hill buys 1 XYZ Jun 70 put spread, Jill sells 1 XYZ Jun put with a strike price that is ________.
Higher
T/F: options are derivative since their value is based on the changing value of an underlying instrument.
T
An investor sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What are the breakeven points?
For the call= 70+6=76
For the put=65-6=59
Sandra buys 1 ABC Dec 70 call at 4. What is Sandra’s maximum gain?
Unlimited
If a married out is established and the option expires, what happens to the investors basis?
The basis (cost of the stock plus the cost of the option) will stay the same even after expiration.
An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What is the investors maximum gain?
Unlimited gain on the long call, $3,600 gain on the long put. Gains occur at f the stock rises or falls dramatically.
If exercised against, the writer of an equity call option is obligated to _____ the underlying stock.
Sell
T/F: A combination contains two calls or two puts.
F; a combination, as with a straddle, consists of one call and one put
Consider the following: BNB Jan 30 Put at 2. If BNB is trading at 30, how much intrinsic value does the option have?
0, it is at the money
If Will has held ABC stock for 3 years and then buys a put on ABC stock, is the holding period affected?
No, once a long term holding period is established, it is not destroyed by a put purchased.
If asked to determine basis or sales proceeds on an exercises put, remember to ________.
Put Down (SP-Premium)
Long 1 TNT Aug 50 call at 5 and short 1 TNT Aug 60 call at 2. Is the spread a debit or credit? Is it bullish or bearish?
The larger premium is on the buy leg, so it is debit. The dominant leg is the purchase of a call, so it is bullish
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the investors maximum loss?
Unlimited. The investor has no protection if the stock continues to rise about the 38 breakeven.
The maximum expiration for standard equity options is _______ months.
9
Upon exercise, what must index option sellers deliver to the buyers?
The in the money amount of the contract (based on the close) multiplied by $100
An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar call at 3. Is this a debit or credit spread?
Since the larger premium is on the sell leg, this is a credit spread, sold for a net premium of 4.
T/F: If an investor expects the US dollar to strengthen, she could profit by buying US dollar calls.
F; there are no US dollar calls or outs issued; therefore, all answers must be based on a world currency
Identify the position: An investor buys 1 GDG Mar 50 call at 4 and buys 1 GDG Mar 50 put at 4.
A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration and strike price.
An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. What is the investors breakeven point?
95-7=88 (always between strikes). For our spreads, the net premium is subtracted from the higher strike (PUT DOWN)
T/F: A 60 call with the market at 63 is in the money.
T
About option gives the owner the right to ________.
A put option the owner the right to sell.
An investor is long 1 DEF Apr 35 put at 3 and short DEF Apr 30 put at 1. Is the investor bullish or bearish on DEF?
He is bearish. The dominant leg is the buy leg, which makes the investor the buy of a put.
Sell 1 RST May 95 put at 8 and buy 1 RST May 80 put at 1. To profit, should the spread widen or narrow?
If the premium spread narrows, much of the $700 net premium is kept. Remember, SELLER and NARROW have 6 letters.
Which has unlimited risk?
1. Long stock + short call
2. Short stock + long call
3. Short stock + short put
Short stock + short put
An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum gain?
$7,500 (strike price minus premium)
Joe sells 1 ABC Oct 55 call. To create a debit call spread, Joe buys 1 ABC Oct call with a strike price that is ________.
Lower
What is the tax result for a LEAP that was purchased at 6 and two years later sold at 2?
A long term capital gain of $600. Remember, a gain on an asset held greater than one year is long term
An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. What is the investors break even point?
60 + 4 = 64 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP)
Julio bought a 75 call at 5 and later exercised the option. What is Julio’s cost basis?
75 + 5 = 80 (strike price plus the premium)
An investor holds 1 XYZ Jan 80 put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?
A loss of $500, since the option expired at the money
An investors buys 100 shares of RST at 30 and sells 1 RET Oct 35 call at 2. What is the investors break even point?
30 - 2 = 28 (cost of the stock - the premium received)
How would an option order ticket be marked for an investor whose initial transaction was the purchase of a call?
Opening purchase
Sell 1 ABC Mar 30 call at 7 and buy 1 ABC Mar 40 call at 3. For profit, should the spread widen or narrow?
If the premium spread narrows, much of the $400 net premium is kept. Remember, SELLER and NARROW have 6 letters.
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec put at 4. What are the breakeven points for the investor?
70 + 8 = 78 and 70 - 8 = 62. The combined premium of 8 is added to 70 (call up) and subtracted from 70 (put down)
What is the primary use of VIX options?
To give individual investors the ability to trade market volatility
Sell 1 BLS July 40 call at 6 and buy 1 Oct 40 call at 10. Is the spread vertical or horizontal? Is it a debit or credit?
This is a horizontal spread (different expirations) and it is a befit spread (paid out more that it was received).
An investor writes 1 DEF May 55 call at 6. Later at expiration, if DEF has fallen to 53, is there a gain of loss?
A $600 gain on the premium
An investor is long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. What is the investors maximum loss?
The net premium of $200. Remember, buyers cannot lose more than the premium
An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan put at 2. What is the investors strategy?
Stability
To offset an option sale, an investor would execute a _____________.
Closing purchase
What is the VIX?
The CBOE Volatility Index Options, which is a leading barometer of investor sentiment and market volatility
Jim is short 1 MNO Aug 40 put at 4.50. What is Jim’s breakeven point?
40 - 4.50= 35.50 (strike price minus the premium of put down)
An investor buys 1 DEF May 50 call at 3 and buys DEF May 40 put at 1. What is the investors strategy?
Volatility
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investors maximum gain?
$600. If the stock rises, the investor could profit starting from the breakeven of 34 up to 40.
An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. Is this a debit or credit spread?
Since the larger premium is on the sell leg, this is a credit spread, sold for a net premium of 7.
An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the reason for selling the put?
To generate income (the premium); also note the premium provides a partial hedge against upside risk.
What are the hours of operation for the interbank market?
24 hours a day
T/F: A 110 call with the market at 108 is out of the money.
T
An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investors maximum loss?
$800. If it stays at 70, both options expire. Remember, buyers cannot lose more than the premium
But 100 shares of IBM at 91 and also buy 1 IBM Nov 90 put at 2. If IBM later falls to 84, what is the maximum loss?
$300. At exercise, the stock bought at 91 can be sold at 90 ($100 loss) plus the cost of the option ($200 loss)
An investor writes 1 DEF May 55 call at 6. Does she have a right or an obligation?
Obligation to sell at 55
The maximum gain for an option seller is the ___________.
Premium
Identify the position: An investor writes 1 STC Jul 70 put at 7 and owns 1 STC Jim 60 put at 3.
A spread, which is the sale and purchase of calls or puts.
T/F: maximum gains and maximum losses could be unlimited with vertical spreads.
F; spreads limit both gains and losses. Remember, net premium is the loss for the buyer and the gain for the seller
The maximum expiration for LEAPS is _________ months.
39
T/F: A spread consists of both a long and short option position.
T; a spread consists of either a long call and short call or a long put and short put
Short 1MNO Aug 40 put at 4.50. MNO falls to 30, the out is exercised and the stock is immediately sold. Result?
A loss of $550. The break even is 35.50, but the stock fell 5.50 lower than 35.50
An investor holds 1 XYZ Jan 80 put at 5. What is the result if later XYZ falls to 65, and the put us exercised?
A profit of $1,000. The investor needed the stock to go down at 75 to breakeven, and the stock fell 10 points beyond 75.
An investor sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is this position?
Short combination
Calls and outs are two ________ of options.
Types
Yield based options are _______- based.
Yield based (rather than price based)
Consider the following: BNB Jan 30 put at 2. If BNB is trading at 30, how much time value does the option have?
$2.00 or 2 points
An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. Is the investor bullish or bearish on ABC?
Bullish. The dominant leg makes him a buyer of a call
Long 1 XYZ Jan 80 put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?
A $750 gain. The investor originally paid $500, but then received a $1,250, netting $750 gain
Holden buys 1 STC 65 call at 3. Later STC rises to 72 and the call is liquidated at 8.50. Is there a gain or loss?
Gain of $550 (determined by the difference between the $300 paid for the option and the $850 received on the sale)
